A Primer on Long-Term Care Insurance

The number of Americans age 65 or older is projected to more than double over the next four decades, from about 39 million today to 89 million in 2050. As the nation’s population continues to age, an increasing number of individuals will require some form of long-term care. As a result, many people are taking a closer look at buying long-term care insurance to protect themselves and their families — just in case.

Whether you should buy long-term care insurance is a decision that deserves careful consideration. A review of your current resources and your estate planning objectives will help you determine whether long-term care insurance makes sense for you.

What Is Long-Term Care Insurance?

The typical long-term care insurance policy will pay for custodial care after a waiting period has expired, reimbursing expenses up to a maximum limit specified in the policy. Eligibility for reimbursement usually hinges on the covered individual’s inability to perform several activities of daily living, such as bathing and dressing.

Income Tax Benefits

The cost of long-term care insurance can be steep, but federal tax policy offers some relief. If you itemize deductions on your tax return, amounts paid for long-term care premiums may be deductible as a medical expense up to a certain dollar amount (see below). The amount of your total medical expenses that exceeds 7.5% of your adjusted gross income is deductible.

Here’s a breakdown of the maximum deductible premium amounts for 2011:

These deductible premium limitations apply on a per-person basis. Thus, for example, a married couple over age 70 filing a joint tax return could potentially deduct up to $8,480 ($4,240 × 2). The deductible amounts are adjusted annually for inflation.

The tax code also grants favorable tax treatment to amounts received from long-term care contracts. Benefits from a qualified long-term care insurance contract are generally income-tax free, subject to certain limitations. In 2011, an individual can generally receive up to $300 per day ($109,500 annually) of tax-free benefits. Be aware that only qualified policies pay out tax-free benefits and allow you to take a tax deduction for the premiums.

Know the Details

When evaluating policies, shop carefully and ask plenty of questions to find a policy that’s appropriate for you. One important consideration is inflation protection, especially if you are buying the coverage at a relatively young age. Look for a policy that allows for increases in benefit payments to compensate for future increases in the cost of long-term care services.

Another consideration is the policy’s waiting period. The typical long-term care insurance policy will pay benefits after a specified waiting period has expired. Thus, you’ll need to determine how much up-front financial risk you are willing to assume. You can typically lower the policy premiums by choosing a longer waiting period.

Other features for evaluation include the amount of benefits the policy will pay for each day that assistance is needed and the length of time the policy will continue to pay for care.

Get Help

If you’ve had a first-hand family experience with paying for long-term care, you know how costly nursing homes and other arrangements can be. As part of your personal financial and estate planning, you may be weighing the possibility of buying long-term care insurance. If you’d like assistance, please contact me. I can help you evaluate your financial situation and review the features of any insurance plan you may be considering.